What Explains Paytm’s Crash? What It Means for Other Tech Firms

Shares of One97 Communications recovered on 23 November, by almost 6 percent to hit Rs 1,489.80 on the NSE.

Paytm logo used for representational purposes.

(Photo Courtesy: Twitter/@Paytm)

After opening the country’s biggest-ever Initial Public Offering (IPO), worth Rs 18,300 crore, Paytm’s shares took a dive for the first two days, inflicting massive losses on investors that bought into the much-hyped IPO.

Though shares of One97 Communications, the parent company of Paytm, have started recovering, the digital payment giant still has a long way to go after dropping nearly 40 percent from its issue price of Rs 2,150.

But what explains this plunge? What does it mean for other tech firms looking to go public? Read on!

WHY DID PAYTM'S SHARES FALL?

One97 Communications' IPO was one of the most awaited IPOs of the year, with investors hoping for strong returns following the success of other new-age tech firms like Zomato and Nykaa.

However, the excitement was short-lived as One97 Communications struggled to garner a full subscription, with less than 50 percent of the stock being subscribed even on the second day of listing.

Here's what held back major investors:

• The company's expensive valuation

• Diversified nature of its platform

• Size of the IPO

Niraj Shah, Markets Editor at BloombergQuint, told The Quint that since Paytm is not in a niche sector with fairly high pockets of competition in Google and PhonePe, it didn't have the same listing pop as previous IPOs like Zomato.

Furthermore, in a note to clients, experts at Macquarie Research had stated that Paytm's business model was lacking 'focus and direction,' Reuters had reported.

The research house had said in a report,

"Dabbling in multiple business lines inhibits Paytm from being a category leader in any business except wallets, which are becoming inconsequential with the meteoric rise in UPI payments. Competition and regulation will drive down unit economics and/or growth prospects in the medium term in our view."

Macquarie Research report, as quoted by MoneyControl

However, Paytm's founder Vijay Shekhar Sharma had said after the crash that one day's loss does not show the whole picture.

Speaking to NDTV, Sharma had said:

"People need to understand that a payments company can expand to financial services, insurance, and investments. Since it is a first-of-a-kind business model it is tough for people to account for the business model. We need to explain our business model to people and then execute it on time. Then they will probably become more comfortable."

Further, considering the absence of a licence to enter the lending business, institutional investors have flagged concerns with the company’s growth prospects.

WHAT DOES THIS MEAN FOR OTHER TECH FIRMS?

As per Richa Agarwal, Editor and Research Analyst, Hidden Treasure, companies like Zomato and Paytm are not really offering a unique value innovation to create new markets as both have competitors, Times of India reported.

She was quoted as saying, “The real differentiators create sustainable value and virtuous feedback loop. However, most startups, despite claiming to be disruptors, are growing on borrowed money, creating unsustainable and non-self-reliant business models”.

Meanwhile, referring to Paytm's plunge and what that will mean for other technological firms, veteran BSE broker Pawan Dharnidharka was quoted as saying, “Markets will punish overpriced IPOs. When the share price trades at a discount of 20 percent on the listing day, that’s a clear sign that promoters should not fleece investors. Issuers should leave some profit for investors while listing the shares", Indian Express reported.

Though IPOs had been running hot, Paytm’s plunge seems to have cast a shadow over other tech firms preparing to go public, making investors more cautious about new-age firms.

(With inputs from Money Control, Times of India, The Indian Express, and Reuters.)